We stay cautious on MSCI China in the coming months, despite possible technical rebound because: (1) We see downside earnings risk to MSCI China due to the economic deceleration on the back of the combined ripple effect of the crack-down on property sector and slowdown in banks’ lending to local government-funded investment projects. (2) Policy risks, such as the resource tax, which may hurt the earnings of and de-rate the multiples of the energy and upstream resources companies. (3) Tight liquidity situation in China, as reflected in the recent rise in short-term interest rate in the repo market as well as inter-bank market. (4) Possible additional tightening measures in the property and FAI areas, such as raising share capital funds requirement for investment projects, and property tax on tier one cities on a pilot basis, etc. We recommend investors to wait for a better entry point until the above-listed concerns are addressed before buying China’s secular growth sectors.
China Strategy
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